House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J.S. Dawkins, M.P.)

Transitional Arrangements

A. Introduction

23.1 This chapter discusses the transitional arrangements that will apply to determine whether a taxpayer's rights and obligations in connection with dealings with goods will be determined under the existing law or under the new law. The transitional arrangements are set out in the Sales Tax Amendment (Transitional) Bill 1992, although there are some related provisions in the Sales Tax Assessment Bill 1992.

Unless otherwise stated, all clause references are to the Sales Tax Amendment (Transitional) Bill 1992.

B. Explanation and Commentary

Termination of the existing sales tax law

23.2 General principle: A general principle of the transitional arrangements will be that, with one exception, the existing law will not impose sales tax on any act, transaction or operation with goods that happens on or after the first taxing day. [subclause 4(1)]

The effect of this principle will be that any sale, entry for home consumption or application to own use of goods that occurs before the first starting day will be subject to the existing law and not to the new law.

23.3 Exception for leases: The single exception to the general principle will apply to goods that have been leased before the first taxing day. For these goods, the existing law will continue to apply for a period of 2 years after the first taxing day. In broad terms, this means that the existing law will continue to impose tax on subsequent leases of those goods if the grant occurs within 2 years after the first taxing day.[subclause 4(2)]

23.4 Reason for exception: The sale value of the grant of a lease of goods to which the existing law applies is the amount that the Commissioner determines to be fair and reasonable. The Commissioner has, as a general rule, determined that amount to be the amount of the lease payments, rather than the fair wholesale value of goods (as applies for other dealings with goods). However, tax on a fair wholesale value will ultimately be paid because subsequent leases of the goods are also subject to tax. At the first taxing day there will be many leased goods which will not yet have borne tax on the equivalent of a fair wholesale sale value. However, subsequent leases of these goods would not otherwise be subject to sales tax under the new law because the general approach of the new law is to impose tax only on the first lease of assessable goods. The extension is necessary, therefore, to prevent a windfall gain to some lessors.

23.5 Examples of the application of the exception:

Example 1: Company X is a registered person who first leases-out goods 6 months before the first taxing day. The term of the lease is 8 months. At the end of the lease (which is 2 months after the start of the new law), X grants another lease of the goods, for a period of 6 months. At the end of the second lease, X sells the goods to Y who leases the goods to Z for a further period of 6 months.

Result: X is liable to tax under the existing law for both the first and second leases. Y is not liable on the third lease of the goods.

Note:

If the sale of the goods by X is to a related company and the purpose of the sale is to avoid paying any further tax on the goods under the existing law, then the general anti-avoidance provision of the new law could apply.[clauses 92 and 93 of the Sales Tax Assessment Bill 1992]

Example 2: X first leases goods 6 months before the first taxing day. The term of the lease is 4 months. The lease is exempt from tax because it is covered by an item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. The goods are not leased at the first taxing date, but X grants another lease of the goods 2 months after the first taxing day. The term of the lease is 3 years.

Result: X will be liable on both leases. The sale value of the second lease will be the lease payments of the full term of the lease, even though it ends more than 2 years after the first taxing day.

Transitional operation of the new law

23.6 General principle: The new law will apply only to tax dealings with goods that occur on or after the first taxing day. [subclause 16(2) of the Sales Tax Assessment Bill 1992]

23.7 The new law can apply before the first taxing day: Although the new law cannot impose tax on a dealing with goods that occurs before the first taxing day, it is capable of applying (for other purposes) to acts and omissions that occur before that day. This provision is essential to ensure that tax is imposed on dealings with goods either under the new law or the existing law. In the absence of this provision, there would be a number of acts, transactions or operations with goods which might fall outside either law. The broader purpose of this provision is to ensure that when the new law refers to a course of conduct or series of events, and some (but not all) elements of that conduct or those events occur before the first taxing day, then the conduct or events will be covered by the new law. However, there are exceptions to that general purpose in a number of areas. [subclause 3(2) of the Sales Tax Assessment Bill 1992]

23.8 Examples of the application of the new law:

Example 1:

Company X manufactures goods before the first taxing day and sells them by wholesale after the first taxing day.

Result: The new law will impose tax on this dealing, even though one of its essential elements (the manufacture of the goods) occurs before the first taxing day.

Example 2: Company X purchases goods, for a tax-inclusive price, and makes a payment of royalty in connection with the goods before the first taxing day. X then sells the goods by retail after the first taxing day.

Result: X may not be liable to tax on the sale (as an external costs sale) because that assessable dealing specifically excludes external costs incurred before the date of introduction of the Bill in the House of Representatives. However, if the cost is incurred between the commencement date and the first taxing day, then tax will be imposed on any sale that occurs after the first taxing day, even though the royalty was paid before the first taxing day.

Example 3: Company X enters into an avoidance arrangement before the first taxing day which affects the amount of tax payable on an assessable dealing that occurs after the first taxing day.

Result: Under the general principles, the general anti-avoidance provision ( 'the GAAP' ) would be expected to apply to this scheme. However, a specific element of the GAAP is that it will not apply to schemes entered into on or before 26 May (the day that the Bill was introduced into the House of Representatives).[subclause 92(1) of the Sales Tax Assessment Bill 1992]

23.9 Dealings with goods taxed under the old law: There is no general restriction on imposing tax on an assessable dealing with goods under the new law if those goods have already been taxed under the existing law. This is consistent with the existing law, which does not restrict the subsequent taxing of goods that have already borne tax. An example of a situation in which the existing law imposes tax on goods more than once is if goods are the subject of successive wholesale sales and the purchasers do not quote. If the new law imposes tax on goods that have already borne tax under the existing law then, with one exception, the new law will give the taxpayer a credit for any tax paid on the goods under the existing law.

23.10 Some assessable dealings will not apply to goods taxed under the old law: The new law will impose tax on an 'untaxed goods sale or AOU'. Broadly, these are goods that either have not previously been taxed or would have been taxed except for the operation of an exemption Item in the proposed Sales Tax (Exemptions and Classifications) Act 1992. In the absence of a special provision, it is possible that some goods taxed under the existing law might fall inadvertently into the definition of 'untaxed goods'. There will be a special provision that prevents these dealings from applying to goods which have been taxed under the existing law or which would have been taxed under the existing law except for the operation of an item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. [clause 5]

23.11 Australian-used goods: The new law will not impose tax on Australian-used goods. which, broadly, are goods that have been applied to own use in Australia). Australian-used goods are not assessable goods. As mentioned in paragraph 23.7, the new law will be capable of applying to acts and omissions that occur before the first taxing day. A consequence of this is that, at the first taxing day, goods can be regarded as Australian-used goods because of an application to own use ( as defined in the new law. that occurred before the first taxing day. However, if those goods have not been regarded as applied to own use (or have not gone into use or consumption) as defined in the existing law, then they will not be taxable under either the new law or the existing law.

23.12 To overcome this problem, there will be a special transitional provision which will apply to treat, as assessable goods, goods which were applied to own use (as defined in the new law) before the first taxing day. This rule will apply unless:

•

tax was imposed on the AOU under the existing law; or

•

tax would have been imposed on the AOU except that it was exempted under the Sales Tax (Exemptions and Classifications) Act 1935 because the applier could not be taxed for any reason.

There will be one exception to this rule. Any packing AOU that occurred before the first taxing day will result in the container being Australian-used goods on the first taxing day. There will be no tax payable on that packing AOU. However, the normal taxable value rules will apply if any of the contents are assessable goods that are the subject of a later assessable dealing. In that case, the taxable value of the contents will include the value of the container.

Example:

Goods (as defined in the existing law) are packed into a container before the first taxing day and the goods, and their container, are sold by wholesale after the first taxing day. At the time of the sale the contents are assessable goods.

Result: The container will be treated as Australian-used goods on the first taxing day. When the contents are sold by wholesale, the taxable value of the contents will include the value of the container.[clause 6]

23.13 Goods obtained under quote: A key concept of the new law is 'obtaining goods under quote'. It is an element of several assessable dealings and of several credit grounds. The term is defined in the new law to mean a quote of:

•

an exemption number by a registered person; or

•

an exemption declaration by an unregistered person.

'Exemption number' and 'exemption declaration' are new concepts. In the existing law, the equivalent concept to quoting an exemption number is the quoting of a certificate of registration. There is no equivalent, in the existing law, to the quotation of an exemption declaration, although there are administrative arrangements in place which are broadly similar.

23.14 In the absence of a special provision, a person who obtained goods before the first taxing day by quoting a certificate of registration would not be taken to have obtained the goods under quote for the purposes of the new law. As a consequence, a sale or application to own use of those goods after the first taxing day would not be taxable under either the new or the existing law. In order to prevent this from happening, there will be a special provision in the new law which will treat goods obtained under quote of a certificate of registration under the existing law as obtained under quote for all purposes of the new law.[clause 7]

Example:

Company X purchases goods before the first taxing day and quotes its certificate of registration. After the first taxing day, X sells the goods by retail.

Result: The retail sale of the goods will be an assessable dealing by X (a retail sale of goods obtained under quote - AD2b).

23.15 Credits will be available for goods taxed under existing law: Tax that is paid or payable under the existing law, or which is borne under the existing law, will be treated as if it is tax paid, payable or borne under the new law for the purposes of the credit rules. Consequently, if a taxpayer pays tax on a dealing with goods under the existing law and then becomes liable to tax under the new law on a subsequent dealing with the same goods, then the taxpayer will be entitled to a credit under the new law for the tax paid under the existing law.[clause 9]

Example:

Company X purchases goods for an amount that includes tax paid by the vendor. The purchase occurs before the first taxing day. Company X sells the goods by wholesale after the first taxing day (and the goods are still assessable goods at the time of the sale).

Result: The sale of the goods after the first taxing day will be an assessable dealing. Company X will be liable to tax on the dealing but will be entitled to a credit for the tax paid under the existing law to the extent that it has been included in the purchase price for the goods.

23.16 The credit grounds are set out in Table 3 in Schedule 1 to the Sales Tax Assessment Bill 1992. Column 5 of that table specifies the time at which each of the credit grounds arises. This is usually the time at which occurs the last of the elements of each ground. As a general rule, if that last element occurs on or after the first taxing day, then the credit will arise under the new law and not under the existing law.

Example:

EB Ltd sells goods by wholesale under the existing law to AD Ltd. who does not quote on the purchase). EB pays tax under the existing law on the sale. After the first taxing day, AD sells the goods by wholesale to MP Ltd (who does not quote on the purchase). That sale is an assessable dealing (AD1b) and AD pays tax under the new law.

Result: AD is entitled to a credit under the new law (Credit ground 4) for the tax paid under the existing law.

23.17 There will be some cases where, if the last element only of the credit entitlement occurs after the first taxing day, then the new law will not apply. This is because the credit entitlement essentially relates to acts, transactions or operations which are fully covered by the existing law. These will be:

CR1 (tax overpaid): If the overpayment is in connection with an act, operation or transaction that occurred before the first taxing day, then CR1 will not apply.

CR11 (goods exported): If the claimant has borne tax on goods before the first taxing day but exports the goods on or after that day, then CR11 will not apply.

CR12 (output goods exported): If the claimant has borne tax on the output goods before the first taxing day but exports the goods on or after that day, then CR12 will not apply.

CR13 (container exported): If the claimant has borne tax on the container before the first taxing day, CR13 will not apply.

CR19 (leased goods exported): If the claimant has borne tax on the goods before the first taxing day, then CR19 will not apply.

CR20 (R & D approval obtained): If the claimant has borne tax on the goods before the first taxing day, then CR20 will not apply.

CR21 (bad debt): If the claimant has paid tax on a dealing that occurs before the first taxing day, then CR21 will not apply. [clause 9]

23.18 Registrations: The new law will maintain the registration of persons who are registered under the existing law immediately before the first taxing day. However, it will not provide any special entitlement to registration if, on the first taxing day, the registered person does not satisfy any of the grounds for registration under the new law. Consequently, the Commissioner may cancel any person's registration if that is the case. To enable the Commissioner to de-register persons who are not entitled to registration under the new law, persons registered under the existing law who have no entitlement to registration on the first taxing day will be required to notify the Commissioner of that fact within 21 days after that day.[clause 10]

23.19 Continued operation of some exemption items under existing law: Some of the exemption items in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 will continue to apply after first taxing day, but they have not been included in Schedule 1 to the Sales Tax (Exemption and Classifications) Bill 1992. The items to which this special transitional provision will apply are:

(i)

items 14 and 14A: Goods for use in the mining industry;

Reason: The structure of the items is not consistent with the structure of the exemption Items in the new law.

(ii)

item 105: Certain UHF television transmitters.

Reason: Item 105 will have no application after 1 January 1993, so it has not been thought necessary to reproduce it in the new law.

23.20 Continued operation of the small manufacturers exemption: The existing law provides 2 exemptions for the dealings of manufacturers whose total liability to tax is below certain threshold levels. These exemptions are provided in items 100 and 103 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. It is possible that there may be some taxpayers who can obtain a greater exemption under the existing concession than under the new small business exemption. This would only occur in isolated situations, usually with manufacturers whose turnover consisted almost exclusively of goods taxable at the highest rate of tax (30%). In these cases, if the dealing is taxable under the new law, but would have been exempt under item 100 or 103 if the existing law still applied, then the dealing will not be taxable under the new law. [clause 12]

23.21 Modification of the small business exemption - 'countable dealings': An essential element of the small business exemption is that it will apply only if the tax liability on countable dealings over the preceding 12 months does not exceed $10,000. This term is defined by reference to dealings under the new law and not to dealings under the existing law. It will be necessary to ensure that, on the first taxing day, the concession will not apply to taxpayers whose dealings under the existing law exceeded $10,000. Therefore, there will be a special provision that will modify the meaning of the total tax liability on countable dealings to include:

•

tax payable under the old law on the sale value of any 'dealing'; or

•

tax that would have been payable under the old law on the sale value of any dealing except that the small manufacturer's exemption applied.

However, this will not include any tax imposed on an entry for home consumption of imported goods under the Sales Tax Act (No. 5) 1930. [clause 13]

Example:

PAL is a wholesaler/retailer of goods which it does not manufacture. During the period commencing 2 years before the first taxing day PAL has paid tax of $5000 per month. None of this tax is paid on goods entered for home consumption under the old law.

Result: On the first taxing day, the small business exemption will not apply to PAL because the tax liability on countable dealings in the previous 12 months under the existing law exceeded $10,000.

23.22 Modification of the small business exemption - tax-free inputs: One of the exclusions from the application of the small business exemption will be an assessable dealing with output goods that have a sufficient link with input goods, and the taxpayer has not borne tax on the input goods. The purpose of this exclusion is to ensure that the small business exemption applies only to exempt output goods if their input goods have borne tax. In the case of most inputs goods (except for raw materials used in the manufacture of the output goods), the exemption will not apply if the linked input goods were purchased tax-free less than 2 years before the assessable dealing with the output goods. However, if this restriction were to apply from the first taxing day it would severely limit the application of the small business exemption. It would particularly disadvantage taxpayers who cannot access the existing small manufacturer's exemption, but who will be able to access the small business exemption. However, most of them would have purchased their inputs tax-free under the existing law. In order that these taxpayers will not have to wait for 2 years before accessing the concession, the exclusion in the small business exemption will not apply to inputs that were purchased or applied to own use before the first taxing day.[clause 12]

23.23 Containers: The taxable value of any assessable dealing will include the value of any associated container, except if the container has been the subject of a previous taxable dealing in its own right [clause 35 of the Sales Tax Assessment Bill 1992]. 'Taxable dealing' does not, in its ordinary meaning, include a dealing on which tax was imposed under the existing law. There will be a special provision that will alter the meaning of 'taxable dealing', for the purpose of clause 35 only, to include a dealing that attracted tax under the existing law.[clause 8]

23.24 Monthly and quarterly remitters: Under both the existing and the new law, a person whose liability to sales tax is below a certain amount has the option to pay tax on a quarterly basis. The remainder of taxpayers pay on a monthly basis. Under the new law, the first taxing day may occur during sales tax quarter, rather than at the start of it. Therefore, some of a quarterly remitter's total tax liability for that quarter will arise under the existing law and the rest under the new law. The approach of the new law, with one exception, will be to let the new and existing laws operate in tandem for the tax payable during this quarter. So, for example, references to tax payable throughout Part 5 of the new law (Collection and recovery provisions) will mean tax payable under the new law in respect of the quarter in which the first taxing day occurs. Tax payable under the existing law in respect of that quarter will be dealt with under the existing law.[clause 14]

23.25 The one exception to this approach will apply to the provision which will identify the circumstances in which a person can be a quarterly remitter [clause 62 of the Sales Tax Assessment Bill 1992]. In determining whether the conditions set out in that clause are satisfied, references to tax payable and obligations to pay tax and lodge returns will be interpreted as including references to tax payable, and obligations, under the existing law.

Regulations

23.26 There will be power to make regulations concerning transitional matters [clause 15] . The purpose of this regulation-making power is to deal with specific issues, not covered by the general transitional provisions, which may only be identified after the new law was introduced in the House of Representatives. The power will be a general one. However, there will also be specific powers to make regulations providing for:

(i)

approvals given under the old Exemptions and Classifications Act to continue to have effect for the purposes of corresponding provisions in the new Exemptions and Classifications Act;

Example:

Item 135A of the existing law exempts motor vehicles for use by persons who have been certified by the Secretary of the Department of Community Services as sufficiently disabled to meet the tests set out in the item. The regulations will ensure that these certificates continue to apply in the same way as if the new law was not enacted.

(ii)

regulations under the existing Exemptions and Classifications Act (with appropriate modifications) to continue to have effect for the purposes of the new Exemptions and Classifications Act.